Although we have revised our mediumand longterm oil price forecasts upwards, we continue to believe that there is a risk of seasonal weakness now that the US driving season is over. This view is discussed in more detail later but is based on three main arguments:

First, OPEC’s increase in quotas signals Saudi Arabia’s desire for lower oil prices, in our view. Note that the Kingdom should see its Khursaniyah field start up in December 2007. This is a light crude field with peak capacity of around 500Mbbl/d.

Second, the oil price tends to fall seasonally after the summer as falling US gasoline demand tends to drive gasoline prices and hence oil prices down.

Third, refining margins currently provide marginal refiners (hydroskimmers or topping refineries) with little economic incentive to run Brent, let alone heavy crudes.

We therefore do not believe that the product market justifies oil prices at current levels. Admittedly, this is a very short-term indicator but it has often proved to be a lead indicator in our view.

Long-term oil price
Our long-term Brent oil price is set at the level we believe is needed to bring the marginal liquids barrel (oil sands or GTL) to market. Given cost inflation in the industry, we believe that this has risen from USD45/bbl in 2006 to around USD55/bbl currently.

Given the wide range of prices needed to make investment economical, it is possible to argue for an even higher price. However, we believe that many OPEC members, especially Saudi Arabia, would prefer to maintain conventional oil’s competitiveness in the energy market. Accordingly, we have chosen to use USD55/bbl Brent as our long-term oil price as it should deter some investment in oil sands and GTL but should be sufficient to meet OPEC’s financial needs.

Our longer-term forecast is little different from the consensus for equity analysts, but still some way below the futures strip.

The HSBC oil team’’D5s forecasts are based on rounded spot exchange rates. We are now using GBP1=USD2.0 and EUR1=USD1.4 from USD1.90 and EUR1.30 respectively. For our 2010 forecasts, this has offset between half and twothirds of the benefit of the increase in oil prices.

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